Non-constant Growth Stock

The last dividend paid by Company A was $2.20. Its growth rate is expected to be 10 percent for three years, after which dividends are expected to grow at a rate of 6 percent forever. The companys stockholders require a rate of return on equity of 11.5 percent.

a. Draw a clear and accurate timeline of the expected cash flows. (4 marks) (The timeline should consist of time periods (t = 0, 1, 2, . . .), the cash flow asso- ciated with each period, the dividend growth rate(s) and the discount rate.)

b. What is P0, the current price of the stock? (4 marks)

c. What is P1, the expected price of the stock a year later at t = 1? (4 marks)